Insider Transactions: Form 3

The Rules

All newly appointed executives, directors and any shareholders whose stake in the company rises above 10 percent must file Form 3 — also known as the Initial Statement of Beneficial Ownership of Securities — within 10 days of taking ownership. The form typically is a page or so long, and includes the following information:

• The name and address of the insider.
• The new insider’s role at the company (director, executive, or major shareholder). Executives provide their title and role—for example, vice president and chief accounting officer—and not much else.
• The amount of the insider’s stock holdings and the amount and terms of related investments such as options, preferred stock and other derivative holdings.

What to Look For

Form 3 is a quick read, especially compared to some of the longer SEC filings such as the 10K. That said, the information you find in this form might have serious implications for a company’s shares—especially in combination with data from other filings.

Keep these issues in mind when you’re reading Form 3:

How motivated is the insider to get the stock price higher? An insider’s stake in a company may provide incentive for him to act in ways that benefit shareholders. But the strength of that incentive varies with the type and terms of the insider’s investments.

Take W. Anthony Vernon, named president of Kraft Foods North America in June, 2009. Vernon reported direct ownership of 2,245 shares of Kraft Foods Inc. Those holdings were worth around $62,000 when the form was filed. A 25 percent rise in the stock would boost the value of Vernon’s holdings by roughly $16,000.

No big deal. Now take a look at the Form 3 Bank of America executive Thomas Montag (president, Global Markets) filed on August 17, 2009. He reported owning 179,383 shares of Bank of America stock in a trust, worth almost $3 million. He also owned options to buy another 2.1 million shares at $30.71 per share. The stock was trading at $16.56, down from a 52-week high of $39.50, but the options don’t expire for nine years—so that leaves plenty of time for the shares to recover. Finally, Montag owned almost two million shares of restricted stock, scheduled to vest in stages through early 2012. In short, he stands to profit hugely if Bank of America gets back on track in the next few years.

Do new insiders typically have a stake in the company? It’s not a bad idea to review a company’s Form 3 filings over a significant period — say a year or two. Ideally, you’d like to see that every new insider has a healthy stake in the firm’s shares, creating a culture of ownership that can lead to better choices for shareholders.

What experience does the new insider bring to the company? Regardless of whether a new insider owns a stake in the company, find out more about what he brings to the firm. A quick Internet search should turn up news stories and other information about his reputation and experience.